The Challenge
Despite overall inflation trending down, Restaurants Canada’s October Restaurant Outlook Survey revealed restaurant owners are still bracing for higher labour and food costs in 2024 compared to 2023.
As Ryan Moreno, co-founder and CEO, Joseph Richard Group (JRG), explains, when it comes to inflation, all of the conversations around industry challenges roll into one. He points to areas such as labour, supply chain and real-estate, stating: “All of these components have been going up.”
“Input costs are increasing,” agrees Jeff Dover, principal, fsSTRATEGY Inc. And, this, in and of itself, poses a significant challenge for the industry because, “restaurants are a tight margin business — and it’s becoming even more so.”
The cost of labour in particular is an operating expense that has continued to grow, with six provinces implementing minimum wage increases in October 2023. In fact, Restaurants Canada data shows 91 per cent of operators are anticipating higher labour costs in 2024 compared 2023 — and 56 per cent expect it to be significantly higher.
Dover agrees, increasing labour costs are likely going to be an ongoing pain point. And, he notes, those provinces that didn’t just receive a minimum wage increase may see one soon.
“We have a lot of elections going on this year, so I’m sure [minimum wage] is going to become an election platform item. But beyond that, because of labor shortages, you have to pay more than minimum wage anyway.”
The ways inflation is influencing behaviours among the dining public are also an area of concern. “The consumer has changed their spending habits. Instead of going out three/four times a week, now they’re going out once a week,” says JRG’s culinary director, Colin Burslem. “The consumer has changed where they’re spending their money, how often they’re spending it and what that looks like.”
And, when they do go out, they’re more likely to be looking for value. As, Burslem notes, that doesn’t necessarily mean looking for a deal on price. “Not everybody is out there looking for a deal. What’s important to a customer of a restaurant right now, given high inflation rates, is that there’s value in [the experience]. So, is it good service? Is it good wine? Is it good food? Is [all of it] at the level that I expect? And, oftentimes, is it exceeding that expectation?”
And, it’s not just guests that are feeling the pinch. “Everybody’s feeling it — it’s the staff that work in the restaurant, suppliers, producers,” says Burslem. This outside pressure is also an added factor influencing restaurant teams, he adds. “People are more stressed out, they’re more dissatisfied and they’re less engaged” — a challenging dynamic to navigate within a service-driven environment.
The Opportunity
Given the state of inflation in Canada, David Hopkins, president, The Fifteen Group Inc. says, “[For] people who approached it appropriately, it was a massive opportunity…this is the only time I’ve ever seen where consumers have actually given us the green light to raise prices.”
However, Hopkins stresses the importance of approaching price increases properly in order to avoid customer backlash. “Unfortunately, a lot of restaurant [operators] don’t really understand the math behind restaurant profitability and they increased prices way more than they needed to to offset the increased costs.”
As Hopkins explains, “If your food costs increased by 25 per cent, you only have to raise your menu prices by 12 per cent to offset that.” He notes that this is a rate of increase that adapts to increased input costs while still being palatable to guests. “Nobody is happy paying $20 for the club sandwich that was $15 one or two years ago, but they’d be happy to pay $17 for the $15 sandwich.”
Given that the right balance is struck between value and experience, restaurants should be able to maintain traffic. Mastercard Economics Institute’s (MEI) Economic Outlook 2024 shows a 1.58-per-cent increase in spend on dining (in 2023). The report also highlights expectations that consumers will continue to prioritize the discretionary spending that matters most to them “with experiences like dining remaining a popular choice,” despite discretionary spend losing share of wallet to essentials.
And, going back to the economic stress inflation has placed on individuals, Burslem notes there may be some opportunity for restaurants within this. “It’s a scary time for a lot of people when they’re seeing their dollar not going as far and they’re trying to find creative ways to maintain their lives…[which is leading some people] to choose to take on a secondary part-time job.”
At the end of the day, there is also the promise of light at the end of the tunnel. MEI’s Economic Outlook 2024 report notes “the Canadian economy should return to subdued growth in 2024 while inflation slows and the Bank of Canada begins rate cuts.”
